In what is hopefully common knowledge by now, come April 2020 the private sector will undergo wide-ranging reform in regards to contracting. Contractors supplying into the sector for a long time have followed a pretty standard set of rules; there have been a few changes along the way but nothing in comparison to what is on the horizon. Despite the size of change it’s time for everyone to come together and grow accustomed to what will now be defined as the ‘new normal’.

This article outlines what you might need to do to ensure you arrive at an Outside IR35 determination (where IR35 does not apply to the assignment). We investigate what a client can do differently and what a contractor can do to ensure that both the contractual elements are in the right place and the working practices very clearly display actions, which would mean the off payroll rules do not apply.

Clients choosing to operate in this way will set themselves apart from the competition, enabling them to attract the best talent available across the UK’s flexible workforce. It will also make them commercially attractive to contractors who choose where they will supply services.

Contractors working on assignments determined as Outside IR35 will be able to continue to reap the benefits of working as a genuine limited company business.

Contractors and employers need to start changing the way they think and act. They can begin by asking themselves the following questions:

Are we prepared to change how we operate?

What are we going to have to do differently?

How am I going to have to be perceived whilst supplying services?

Will my working practices paint the picture that I want them to?

Do they truly represent the reality of the situation?

If challenged by the UK’s tax payment authority, would the case stand up in court?

Outside the box

You might think it sensible to start talking about what a contractor should be doing. This is important but equally important is how the client is thinking about and scoping the requirement they have. This will enable the business providing services to the client (the contractor) to deliver as they should, like a business would.

If the client doesn’t understand this process or the legislation, then regardless of what the contractor does or says they will do, providing an Inside IR35 status determination for the assignment won’t mirror the reality, and the client will struggle to engage the quality service providers that they need to complete the task. The alternative to the client is going to see them likely have to pay an increased cost and associated rights as an agency worker.

In a rapidly increasing number of cases customers are asking how they can set up an assignment to be determined with an outside IR35 determination. This is great news which indicates the client is engaging with the legislation and working out how to maximise their chances of attracting the best talent available, as well as getting a greater return on investment.

We are working very hard as a compliant provider to ensure that we can help them understand how to achieve that. This is what specialist providers across the UK should be aiming to do for the benefit of everyone in the supply chain. Of course there will be cases, depending on the markets you are in and skill sets that are being used, that there would be no possible way for an assignment to be determined for the rules not to apply. We’re not referring to these ones though, we are referring to the ones that are either in the grey area or further into an outside determinable area already.

Start thinking differently

Clients need to start thinking differently. More time needs to be taken in considering exactly what they are looking to achieve. They don’t need to know how they will achieve it, as that is one of the many benefits in procuring the services of a specialist small contractor business to enable this. That business can help them scope the requirement and the agreed milestones and deliverables that will be performed in line with the contract where all of this information should be clearly laid out.

Job descriptions or properly defined and scoped project requirements?

By its very nature, a job description has a very employment-like feel to it. A job title or the word ‘role’ are signs of providing skills for hours as opposed to being paid for work done, i.e. ‘services delivered’, and should be avoided when looking to procure the services of a specialist independent contractor business for an assignment in an Outside IR35 setup.

An employee provides themselves, their skills, and agrees to do what they are asked, and an employer is obliged to offer them work.

Clients need to start thinking about and scoping requirements correctly with a clear understanding of what they want to achieve through the engagement; by when and at what cost. This should all be carefully considered and entered into the contract document once agreed. This gives both parties a clear contract to work to which defines the actual services that are going to be provided and the indicative milestones for the delivery.

This will help on a number of levels from an Off Payroll Legislation perspective where clients want to achieve an outside determination. This point of differentiation between the ‘employed’ setup and the ‘services delivered’ setup on its own wouldn’t be enough to achieve an outside IR35 determination but it starts to lay the foundations and for other outside IR35 indicators to follow.

Increased return on investment plus no obligation. What’s not to like?

If there is a clearly defined contract in place, it helps to show that the contractor is only there to provide one specific set of services.

Dave Chaplin, CEO of Contractor Calculator says, “If you don’t know what you are going to be working on before you turn up to the customer site, but have agreed to provide skills for 40 hours a week, chances are you are going to be a disguised employee.”

The contractor’s business will have to deliver against the agreed milestones and then move on once their business has delivered in line with the contract. Of course, if whilst providing services to the customer another project is identified, the contractor could scope out that new project or new requirement with the client and put in place a new contract for services (with clearly defined deliverables and supply services in line with this completely new agreement). This helps with the mutuality of obligation point which goes towards achieving an outside determination. This is achieved by clearly scoping out specific requirements and then there is no obligation on the parties to either provide or accept additional work, which is another plus for securing outside determinations.

For the client, contractors working with agreed deliverables and milestones in a contract will likely see a better return on investment as well. A contract for six months with no clear plan could very easily see unidentified milestones or deliverables slip, compared to a contract where these have been correctly defined and tracked.

Dave Chaplin explains, “Historically we’ve seen contractors wanting to negotiate long termination clauses of four weeks or more into their contracts, which from an IR35 perspective is a very strong pointer to being inside IR35.”

Everyone likes to be in control, but who should be?

Another positive to having clear deliverables defined in the contract is that the element of control over the worker by the client is removed. This is another strong element to help show an outside determination. With clearly defined deliverables, the contractor’s business can supply against those (having helped define them) and do so in a way that they choose (they are the specialists after all). There will likely be very little involvement from the client in how the services are delivered other than update meetings on how progress is being made against the contract milestones, which is completely acceptable.

As mentioned, if a client changes the way they think about the engagement type and correctly scope the requirement and procure it correctly, it can have a huge impact on the IR35 status of an assignment. It’s already helped to remove any mutuality of obligation, remove the element of control from the client and put it firmly back in the hands of the contractor’s business who is supplying the services. It has also stopped the contractor looking like part and parcel of the client organisation. As a result, all of these indicators point very firmly towards an outside IR35 engagement and for the rules not to apply. Is that enough? Maybe, buts let’s see if it can be strengthened further.

Financial or rectification risk?

Depending on how far the parties want to go with this you could also (contract dependent) introduce some sort of financial risk. An employee would have no financial risk in any employment relationship or contract that they are working to. If, however, within the contract for services there was an element of financial or rectification risk, this again would help towards securing an outside IR35 status.

To illustrate, let’s assume that a certain part of the project had to be delivered by a specified date and that if the deadline was missed, the service provider may have to supply services free of charge until such point that work was completed in line with the contract. Or, where mistakes had been made, the service provider may have to fix (rectify) those mistakes in their own time or at their own cost. Employees or contractors operating under an inside IR35 setup would not have to do this. This is another indicator of operating with a strong contract and very clear outside IR35 working practices, however it’s not an overriding factor.

Dave Chaplin warns agencies not to be over reliant on this aspect though, “Whilst all contracts should have clauses that indicate mistakes will be rectified at the service provider’s cost, this factor is still minor compared to the main ones of personal service, control and mutuality of obligation.”

Personal service? No, this is a business-to-business agreement

We are now making some real headway into setting up and delivering services as a business would in a business-to-business transaction; helping to put ourselves in a position where an outside IR35 determination can be made. One of the next key elements is personal service or substitution. This one is very important.

If we look at the current (correct at time of writing) wording on CEST (the government tool used to check employment status for tax) it asks the following question of the client:

If the worker’s business sent someone else to do the work (a substitute) and they met all of the necessary criteria, would you ever reject them?

The criteria would include:

Being equally skilled, qualified, security cleared and able to perform the worker’s duties

Not being interviewed by you before they start (except for verification checks)

Not being from a pool or bank of workers regularly engaged by your organisation

Doing all of the worker’s tasks for that period of time

Being substituted because the worker is unwilling or unable to do the work

HMRC then make it very clear that an answer to one of two available options has to be what would happen in practice and not just what it says in the contract. The answers provided are as follows:

Yes - we have the right to reject a substitute for any reason, including if it would negatively impact the work

No - we would always accept a substitute who meet these criteria

To continue moving towards an outside IR35 engagement on an assignment and for the rules not to apply, the client should be answering ‘no’ to this question. They should understand that they are engaged in a business-to-business relationship and that the business can decide at any point who they choose to represent them and carry out the services, as agreed in a clearly defined contract.

As stated before, the answer to this question must reflect the reality and this should be accurately answered.

It is extremely important to note that although this is what the current CEST Tool states (at time of writing), the correct legal case law for substitution is in the Supreme Court ruling for Pimlico Plumbers.

Dave Chaplin, who works closely with cases and attends IR35 tribunals, says: “Firms that use CEST to get outside determinations based solely on substitution, are kidding themselves if they think that will be enough to get through an HMRC investigation and subsequent First-Tier Tribunal. The approach is contrary to the big picture approach laid down by Hall versus Lorimer and Ready Mix Concrete, which underpin how status cases should be judged.”

Flexible engagement and looking like a business

The next consideration to moving towards an outside IR35 determination should focus on the relationship throughout the engagement. Both parties should ensure they are acting in line with the business-to-business contract that has been agreed. No part of the relationship should look like or be confused with that of an employer-employee type set up.

It should be clear to anyone else in the organisation that the contractor is supplying services through their own business and conduct themselves accordingly. This can be achieved by combining a number of small changes to working practices. These are some of the softer differentiators but when combined can make a big difference, although, these are fairly minor compared to the control, personal service and mutuality of obligation elements mentioned previously.

Examples include:

Making everyone you meet aware of the fact you are providing services through a limited company and naming the company providing the services

Ask for an email address including your company name and not just personal name

Using your own equipment and not just the client equipment

Working from your business location and not solely the client site

Providing services when you decide, not mirroring the employee weekly working pattern

Not taking advantage of the employee type benefits that the client may offer

Professional indemnity – ensuring you are insured

Another differentiator and way to build the outside IR35 case is by ensuring your limited company business is fully insured.

An employee of a client will be insured whilst carrying out their duties, for and on behalf of the client. These policies will be paid for by the client and to cover employees of the client. They will usually not cover the services provided by third parties or other independent businesses.

As a result, it’s vitality important that any genuine limited company business has insurance in place to cover the services that they are providing.

In many cases it will be a contractual obligation for the limited company to have a policy in place. At SThree we made it a mandatory requirement that it had to be evidenced before supply commenced to protect everyone in the supply chain. As a minimum, unless the contract with our end client requires different levels, we ask for £1m professional indemnity and £1m public liability to be evidenced by all limited company service providers. This is another small, yet important differentiator, which will help in realising an outside IR35 case and helps to show that you are a genuine business

Thomas Wynne, Managing Director of Kingsbridge Contractor Insurance says, “With the forthcoming changes to IR35 the question of whether a PSC contractor is operating ‘Inside’ or ‘outside’ has attracted renewed focus. To operate ‘outside’ of IR35, a PSC contractor will need to demonstrate that they are a business in their own right. Holding professional indemnity and liability cover in general supports this. PSC contractors offering their services on a genuinely independent basis will therefore need to ensure they have taken out and paid for business insurances, held in the name of their PSC.”

So that’s it?

Absolutely not. All of the above cannot be hypothetical. The working practices need to constantly be in line with the way that a genuine limited company would be expected to act in a business-to-business relationship. It absolutely cannot slip. Not only on the part of the contractor supplying services but on the part of the client procuring those services. Both parties must operate throughout the contract in line with the above. Failure to do so will put both parties at risk.

There has been a lot of noise over the years that the working practices in the engagement carry a lot more weight that the contract itself. Although the day-to-day provision of services does carry more weight in an investigation the contract set up should not be underestimated.

Dave Chaplin says, “The Autoclenz ruling in 2011 enables courts, in certain circumstances where the bargaining power is unequal, to cast aside some of the actual contractual wording, and instead use implied terms based on the working practices. But provided the contract was negotiated and is not a sham, the terms are valid and will form a crucial part of the ‘notional contract’ that is required to assess IR35 status. And provided all parties agree that the contract and working practices are the truth, it will be very difficult for HMRC to introduce implied terms into a notional contract and make it look like one of employment, because there won’t be any evidence to rely upon to do so. But, if the contract is lazily drawn up and points to ‘deemed employment’ it’s considerably harder to defend using a reverse Autoclenz approach. The key point is to get things right from the outset.”

We appreciate not all clients and contractors will be experienced enough or have enough knowledge in how to compliantly set up a contract and ongoing service provision where the Off Payroll Working rules will not apply.

Not everyone will be in a position to get this right from the outset but where possible, we can help make this happen as a leading supplier of the best STEM service providers globally and part of a compliant Plc.

Nicola Hayman, Legal Manager at Kingsbridge Contractor Insurance says, “The potential benefits to end-clients of taking a measured and structured approach in terms of retaining key talent and avoiding costs that might result from unnecessarily placing someone within IR35 are clearly very significant. Clients should look to review their contractors working arrangements to see whether they are potentially at risk of the IR35 reforms and, if so, whether amendments can be made compliantly to working practices for contractors potentially caught to ensure that IR35 does not apply. End-clients who take this approach will not only retain but also attract new talent compared to those who do not”

Final thoughts

The extension of the Off Payroll reform from the public sector and its introduction to the private sector is not the end of contracting; it’s the beginning of the ‘new normal’.

Everyone will need to play their part to make it work and be accountable for making the change. It’s not just going to happen on its own and it is vitally important that both clients and contractors make a decision on how they want to set up assignments, contracts and service provision to make it work.

We will support you to compliantly achieve the outcomes you desire. Through working with SThree and our brands, you are working with a compliant, global Plc with a turnover in excess of £1.2bn and experience in managing IR35 reform in the Public Sector since 2017.

Information contained within this article is provided for guidance only. Such information and materials do not constitute, and are not intended as a substitute for, legal or tax advice. Always consult a suitably qualified lawyer or tax professional on any specific legal or taxation matter. SThree Plc assumes no responsibility for such information and disclaims all liability in respect of such information and materials.

At SThree we call our clients our customers, however to keep this consistent with the wording used in the legislation, we’ve use clients throughout.